Moody’s changes outlook for global aviation industry to positive

Moody’s Investors Service says leisure traffic will lead the charge to the boarding gates, while corporate trips and international long-haul will follow, initially at slower paces.

KUALA LUMPUR: Moody’s Investors Service has changed the outlook for the global airline industry to positive from negative as it expects widespread travel to pick up in the second half of this year and accelerate through next year.

“We expect this positive demand trend to run for many quarters, into 2023, ” it said on Tuesday, pointing out to rising Covid-19 vaccinations will spur a demand in leisure traffic.

It is now using its expectations for growth in travel demand as its key indicator for the passenger airlines industry outlook.

However, it also noted its two pre-pandemic indicators, operating margin and change in operating profit dollars, are less insightful about fundamental business conditions at this stage of the pandemic.

“We expect the industry to sustain operating losses and negative operating margins for all of 2021, although to a lesser degree than in 2020, ” it said.

Moody’s said increasing coronavirus vaccinations around the globe will allow governments to lower barriers to entry for visitors and re-entry for residents returning home.

Leisure traffic will lead the charge to the boarding gates, while corporate trips and international long-haul will follow, initially at slower paces.

The restoration of the ability to travel will relieve the tremendous pent-up demand to fly to visit friends and relatives and for vacations.

“We expect offices in many countries will begin reopening in large numbers by the fall of 2021, which will facilitate the beginning of the recovery of corporate travel. We also expect long-haul international demand to pick up by the end of 2021, driven by the same factors that will spur leisure and corporate travel.

Moody’s said the outlook had been negative since March 6,2020. The change, it said, recognises the significant variation in the rate of coronavirus infections and air travel demand across geographies.

Nevertheless, industry fundamentals will materially improve through the next 18 months.

The rating agency said it was making this change notwithstanding the record high daily infection rate in India; travel restrictions in countries with large amounts of traffic to and from India, such as Dubai and Singapore; and coronavirus lock-downs in other countries, including Canada, Germany and Turkey. Increasing vaccinations will be critical for restoring and sustaining passenger airline operations in these countries and across the globe.

“Additionally, we are changing the outlook even though travel activity in Europe in the first quarter was lower than we had forecast in November 2020.

“While the continuing pandemic means there is a risk of further disruption to air travel in various countries at various times, we believe that over the next 12 to 18 months, the rollout of vaccinations will lead tomaterially increased demand for and ability to travel.

“Vaccinations, opening borders and lowering or removing current barriers such as mandatory quarantines and coronavirus testing, particularly for vaccinated travelers, will need to work hand-in-hand to support a sustained increase in air travel volumes across the globe, ” it said.

Moody’s pointed out the strong recovery in US domestic travel demand that began in March 2021 highlights the benefits of the combination of vaccinations and a large geographic footprint for the return of domestic travel demand

It also noted high infection rates in some European countries and the more limited availability of vaccines, resulting in continued travel restrictions, have so far prevented a surge in demand in Europe similar to that seen in the US since late February.

Importantly, vaccinations have been the key driver of increased travel demand in the US. This will be the case for any market where the share of the population that is vaccinated is rising or is expected to do so.

However, loosening government regulations to allow arriving passengers to move freely without quarantines or COVID-19 tests will be needed for the full return of air travel, of all types; this in turn will be needed to fully restore global activity to 2019 levels.

This is particularly the case for Europe because of the relatively small size of most countries, which limits the size of purely domestic operations for air carriers, and the greater propensity of travelers, both leisure and business, to cross borders.

Moody’s said would consider changing the outlook to stable if it expects the annual growth rate of air travel demand across major markets, measured by the percentage change in RPKs, to slow below 15%.

“We would change the outlook to negative if we were to expect travel demand to decline. A lack of efficacy of vaccines against potential future variants of the coronavirus would be the likely driver of falling demand, ” it said.

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